GlaxoSmithKline Earnings: Fixing Pharma on a Budget

(Bloomberg Gadfly) -- GlaxoSmithKline PLC’s pharma revitalization is still pending. 

GSK claims fixing its teetering drug unit is a top priority, and its recent hire of Roche Holding AG vet Hal Barron to revamp R&D was a good start. But GSK’s first-quarter earnings report Wednesday revealed weak sales for one of its biggest medicines, highlighting the serious threats its pharma unit faces. 

GSK has shown little interest in spending much to bolster the business. And cash is tight anyway, thanks to GSK’s hefty dividend and its recent $13 billion purchase of Novartis AG's share of their jointly owned consumer business.

Barron's rebuilding efforts -- which the company will fully detail in July -- will likely be on a budget.

GlaxoSmithKline Earnings: Fixing Pharma on a Budget

GSK's pharma division had a solid 2017, but sales growth has slowed. The next couple of years will likely be rough as its respiratory and HIV businesses face heavy competition. Its drug-development efforts haven't gone especially well for years, leaving it with little in its late-stage pipeline to counter this sales pressure. 

GlaxoSmithKline Earnings: Fixing Pharma on a Budget

GSK is in the middle of the biopharma pack in R&D spending, but only recently graduated from the back after a period of aggressive cutbacks.

GlaxoSmithKline Earnings: Fixing Pharma on a Budget

That's not the only place where GSK has lagged. The company has spent a paltry $350 million on pharma M&A since 2013 – and that was shared with other members of its HIV drug partnership. The firm's biggest transaction was selling its cancer drugs to Novartis. Its consumer and vaccine businesses have gotten more love. 

GSK hasn’t been notably active on the drug-licensing front either.

GlaxoSmithKline Earnings: Fixing Pharma on a Budget

GSK’s financial position doesn't leave much room for more spending. It pays a generous dividend – its current yield is about 5.7 percent – and that seems unlikely to change. And though the Novartis deal was expected, $13 billion isn’t small change for a company with $18.8 billion in net debt. 

That’s likely why the company is actively purging and divesting R&D programs and why CEO Emma Walmsley said on a call with the media Wednesday that any M&A in the area will be likely be focused on cheaper, early stage programs.

That puts extra pressure on Barron and Kevin Sin, the Roche executive poached to run pharma business development. They likely won’t be able to make many transactions, but they’ll have to get them right. Trouble is, early stage programs are cheaper because they’re more likely to fail and take years to bear fruit. 

A recent Bloomberg Intelligence analysis found GSK has more novel drugs in development than any other pharma firm. But these are largely early stage efforts. Barron will have to be disciplined about which to move forward – late-stage development is very expensive – even though the firm’s deficit of mature drugs in the pipeline will create pressure to produce good news. 

Greater spending doesn't guarantee success, but drug development has a low hit rate. Unless Walmsley is willing to show greater commitment to pharma instead of just talking about it, Barron will need quite a plan, and a lot of luck, to turn things around. 

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

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